Jim Rickards - The US Treasury Shorts the Dollar

With tremendous volatility in the gold market, today King World News interviewed KWN resident expert Jim Rickards, senior managing director at Tangent Capital Markets, to get his take on the situation.  When asked about the gut-wrenching moves that have been dominating the gold market as of late, Rickards replied, “Well, I always think it’s important, Eric, to separate fundamentals and long-term trends.  That’s one thing you have to understand and get right.  But there are short-term technical factors as well.  Gold responds to both.  In the long-run the fundamentals will prevail, but in the short-run the technicals can definitely dominate and this was a week where the technicals dominated.”

Jim Rickards continues:

“Let me explain what I mean by that.  One thing that is going on is there is a massive run on the banks globally.  It is primarily centered in Europe, but also around the world.  There is a huge demand for dollars.  There’s a liquidity shortage and people just need dollars. 

So let’s just say, hypothetically, I have gold and I like gold for the long-run and think it’s a good investment.  I’m a bank let’s say and they (depositors) are withdrawing money and I need dollars.  Well, I will sell the gold to get the dollars, even though I like my gold position and I think it’s going higher.  I may have to sell it to get cash to meet these other obligations in a liquidity crisis and we are seeing a liquidity crisis.

So the action this week is technically driven, but the fundamentals are still intact.  The fundamentals have everything to do with the excess of paper money relative to gold and the potential loss of confidence in paper money that’s coming from over-printing. 

The ECB will print when they see some deflation....

“The Fed will print if the dollar gets stronger because the Fed needs the dollar to be weaker.  With all of this printing coming on stream, you can rest assured the price of gold is going to go a lot higher.”

When asked about the US dollar, Rickards responded, “Some legislation authorized a $100 billion line of credit from the United States to the IMF.  It suddenly occurred to me how this actually works.  The IMF puts in the borrowing notice for the $100 billion and the Treasury sends the $100 billion to the IMF.  They (the IMF) then use it to bail out Europe. 

But here’s what happens, the Treasury sends the money and the IMF gives the Treasury a note because it’s a borrowing.  So that’s very significant because for the first time in history the IMF would be leveraging its balance sheet.  But the note they give the Treasury is not denominated in dollars, it’s denominated in SDR’s.

The SDR includes dollars, but it also includes other things such as Swiss francs, pounds sterling, euros, Japanese Yen and eventually the Yuan.  Now when the note matures, the IMF pays you back in the dollar equivalent of the SDR at that time.  In other words, they don’t give you $100 billion back.  They take the SDR equivalent back and convert it into dollars at whatever the exchange rate is at the time.

What that means is that the Treasury is going short dollars.  Think about the significance of that, Eric.  The Treasury sponsors the dollar.  You take a dollar bill out of your pocket and look at it, the Secretary of the Treasury signs every dollar bill.  It’s sponsored and backed up by the Treasury and yet the Treasury is shorting its own currency by taking SDR notes from the IMF.  My question is, if the Treasury is shorting the dollar, shouldn’t the rest of us be shorting the dollar too?”